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Tuesday, June 12, 2007

The Hamilton Project: Reforms to The U.S. Tax System In Today’s Global Economy

Larry Summers, Robert Rubin, and others are proposing reforms to the U.S. tax system in an event today sponsored by the Brookings Institution, see Reforming Taxation in the Global Age [video] Here's part of the press release that came via email:

The Hamilton Project ... hosted a forum today entitled “Reforming Taxation in the Global Age”... During the forum, the Hamilton Project released a new strategy paper and three new discussion papers examining the need to modernize and reform the U.S. tax code to reduce inequality, expand opportunity and respond to the realities of a global economy. ...

Summers opened the forum by highlighting a new strategy paper he co-authored, along with Jason Furman and Hamilton Project Policy Director Jason Bordoff, on “Achieving Progressive Tax Reform in an Increasingly Global Economy.” The paper highlights the enormity of the increase in inequality: in total $664 billion has been shifted from the bottom 80 percent of households to the top one percent of households. At the same time, the tax system has become less progressive—since 1960 the average tax rate for the top 0.1 percent of households has been cut nearly in half while rising slightly for middle-income families

Summers noted that the erosion of progressivity in the tax code is the result of a combination of deliberate policy choices (like the 2001 and 2003 tax cuts) and the failure to reform the tax code to keep up with rapid changes associated with globalization and the increasingly sophisticated financial system. In particular, Summers highlighted the growing ease with which corporations have leveraged these factors to avoid paying taxes, thus contributing to the income gains for the wealthiest Americans.

“The increase in inequality has shifted $664 billion from middle-class families to the most fortunate – the equivalent of taking away $7,000 from each household in the bottom 80 percent. Rather than trying to offset part of this income shift, the tax code has become less progressive thus exacerbating these challenges,” noted Summers. “This inequality, in turn, undermines political support for a competitive market economy, which contributes to economic growth. By making our tax system more progressive, we can help everyone share in the tremendous benefits generated by the economy while creating the political and economic conditions for sustained growth.”

With recent tax cuts set to expire in 2010, policymakers are beginning to weigh various approaches to tax reform... In a new strategy paper that anticipates these reforms, the Hamilton Project outlines six broad principles that should guide progressive tax reform in today’s global economy... [In addition,]... An important part of the progressive tax system is a robust tax on large bequests and gifts. ... Another area in need of broad reform is corporate taxation of multinational firms. As U.S. firms have become increasingly global, the treatment of foreign income has become a major source of tax avoidance. ...

Members of the expert panel summarized the discussion by noting that the goal of any tax reform measures should include progress toward reducing the nation’s large fiscal gap, making the tax system more progressive, and helping to offset some of the increase in inequality in recent decades. A common thread throughout much of the discussion focused on finding tax reform measures that address inequality while also creating positive incentives for robust and socially responsible economic policies.

“Any attempt to restore fiscal balance will have to address both revenues and spending,” noted former Treasury Secretary, Robert E. Rubin. “One challenge is to strike the right balance so that restoring fiscal balance is joined with public investment in areas critical to economic growth, broad participation in that growth and economic security for American workers and families.”

“The tax code can be an effective tool in promoting social policy if applied wisely,” noted Jason Furman, director of the Hamilton Project. “It can also have a negative impact if not used appropriately, such as in the case of taxes on health insurance which can raise health spending without providing help for many of the uninsured to get coverage. The bottom line: by making the tax system more progressive and making the tax code more fair and efficient, we can have a positive impact on a range of social priorities, from improving health insurance to expanding access to college.”

Here's the introduction to the paper by Jason Furman, Lawrence H. Summers, and Jason Bordoff:

Achieving Progressive Tax Reform in an Increasingly Global Economy, by Jason Furman, Lawrence H. Summers and Jason Bordoff, Hamilton Project: Introduction The progressive tax system, and the nation's fiscal system more broadly, have historically played an important role in expanding opportunities for all Americans while reducing inequality. But the same dynamic forces of technological change, financial innovation, and globalization that have contributed to rising income inequality also present new challenges for progressive taxation. Financial engineering, for example, has made it easier for the financially sophisticated—typically the wealthy—to take advantage of new financial instruments that shelter their gains from tax. And as capital is able to move ever more quickly and easily across borders, corporate income becomes increasingly elusive of taxation. These forces, together with deliberate policy changes, have led to an erosion of progressivity—the principle that higher incomes should face higher rates of taxation—and a dramatic reduction in the average tax rate facing very high-income households. More than half of that decline is the result of declining effective corporate tax rates, as high-income households own disproportionate amounts of capital.

The tax code is not only a means of raising revenue to pay for government services. It also impacts an astonishing array of economic and social activities, from homeownership to education and child care to support for low-income workers. Taxes contribute, as part of the problem or as part of the solution, to many of the challenges our nation faces. The present tax treatment of health insurance, for example, pushes health spending upward while offering many of the uninsured little help in getting coverage. The tax treatment of retirement savings provides a windfall for high-income Americans who would likely have saved anyway, while offering scant encouragement to saving by low- and moderate-income Americans, many of whom face the prospect of an insecure retirement. America's factories and cars continue to emit vast amounts of the carbon dioxide that drives climate change, a problem that would be remedied, in part, if the tax code imposed a cost for burning carbon-emitting fossil fuels.

There is broad agreement about many of the shortcomings of our current tax system, but little consensus about the solution. To make progress, lawmakers will, at a minimum, have to come together in good faith and agree on a broad approach. In an effort to define a common approach, this strategy paper offers six broad principles that reflect the new challenges facing our tax system in the twenty-first century. We believe these principles should command wide assent as policymakers consider tax reforms, whether incremental or far-reaching:

  1. Fiscal responsibility requires addressing both taxes and spending.
  2. Rising inequality strengthens the case for progressivity.
  3. The tax system should collect the taxes that are owed.
  4. Tax reform should strengthen taxation at the business level.
  5. Taxes for individuals should be simplified.
  6. Social policy can and should often be advanced through the tax code—and it must be well designed.

The remainder of the paper will discuss each of these principles in detail.

    Posted by on Tuesday, June 12, 2007 at 01:08 PM in Economics, Income Distribution, Policy, Taxes, Video | Permalink  TrackBack (0)  Comments (19)

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